It’s fitting that director Baz Luhrmann chose contemporary artists like Jay-Z to provide the soundtrack in his new take on The Great Gatsby, because in many ways, the Gatsby story could easily be set in current times. (No, we don’t mean hipsters bringing back vests or flapper hairstyles.) Unfortunately, today’s economy shares many of the same sad qualities of the 1920s highlighted in the Gatsby story: increasing financialization, low socioeconomic mobility, and gross wealth and income inequality such that a privileged few live astonishingly well while a large portion of Americans are struggling just to get by.

EPI has been describing these trends for years. In fact, you might consider our flagship publication, The State of Working America, as a sort of modern-day Gatsby, in charts. The prose may not be as artful as Fitzgerald’s, but the economic descriptions are equally alarming.

The Great Gatsby’s protagonist, Nick Carroway, is drawn to New York by the promise of riches to be made on Wall Street. Indeed, the premium to working in the financial sector at that time was better than ever… until recently. As Figure A shows, at the beginning of the Great Depression, earnings per worker in the financial industry peaked at nearly 1.8 times the earnings per worker of all other private sector workers. After the Depression and the regulation that followed, earnings per worker in finance fell back roughly into line with the rest of the private sector. Beginning in the late 1970s, however, earnings per worker in finance again began to take off. By the onset of the Great Recession, they exceeded 1.8 times the earnings per worker of all other private sector workers. With such striking disparities in compensation, who wouldn’t be attracted to the green light of finance?

The depictions of economic inequality in Gatsby are stark. We catch a glimpse of two worlds, one filled with emerald green lawns and another where coal dust has choked out any sign of color. In 1922, when Gatsby was set, the richest 5.0 percent—the Tom and Daisy Buchannan class—captured a whopping 31.9 percent of all U.S. income (Figure B). That explains the front yard polo and the endless strings of pearls. The picture today is no less bleak, however. The top 5.0 percent of earners in 2010 took home 35.7 percent of all income.

While this share has increased slightly since 1922, it hasn’t simply ticked upwards slowly. There was a period of more equitable growth, stretching from the end of WWII to 1979, during which time overall inequality went down. Unfortunately, since then, either through deliberate policies that favor the top or a lack of policy action to protect the middle class, we’ve created a second Gatsby era.

At one point in the story, Tom Buchanan, the archetypal, old-money blue-blood from “East Egg,” expresses his disdain for the newly-rich residents of “West Egg” where Gatsby resides. Implicit in Buchanan’s contempt is the recognition that income can be fleeting and, thus, is not nearly as important as wealth. Wealth, i.e., the sum of one’s assets (houses, stocks, bonds, marble statues) minus one’s debts, is more enduring; it can be passed on to heirs, creating the dynastic family wealth that his character typifies. In 2010, the top 5.0 percent owned an astonishing 63.1 percent share of all wealth in America. Meanwhile, the entire bottom 90 percent held only 23.3 percent of all wealth. In fact, more than 1 in 5 households (22.5%) actually have zero or negative wealth, meaning their debt matches or exceeds their assets.

The picture gets even more disturbing when you examine wealth by racial group. In 2010, the median white household had wealth valued at $97,000. That is over 20 times the average wealth of black households, which stood at $4,900 in 2010.

The danger with such high concentrations of wealth is that it likely reduces a society’s economic mobility (pdf). When a shrinking portion of the population can afford access to good schools, to decent health care, and to homes in good neighborhoods, then the opportunity to better one’s lot in life begins to become concentrated as well. Jay Gatsby made it (as a bootlegger, mind you), but the reality for most Americans is that they will never venture far from the socio-economic status into which they were born. Studies have shown that a child born into a family in the bottom fifth of the wealth distribution has only a 7 percent chance of reaching to top fifth of the wealth distribution. Conversely, 36 percent of children born into the top fifth of the wealth distribution will remain there as adults, and 60 percent will remain at least in the top two fifths of the wealth distribution.

Economists quantify mobility with a metric called the intergenerational elasticity (IGE), which essentially describes how much of a child’s long-run earnings can be explained by the long-run earnings of their parents—the higher the IGE, the less mobile the society. Figure C shows what CEA Chairman Alan Krueger appropriately called “the Great Gatsby curve” (pdf). On the vertical axis is the IGE and on the horizontal axis, the Gini coefficient (a frequently-used measure of inequality). As the figure shows, countries that have higher levels of income inequality also exhibit a larger IGE, meaning lower mobility. (For more, read the mobility chapter in the State of Working America.)

It is easy to romanticize the exuberance of the Jazz Age. (Luhrmann’s Gatsby throws quite the party.) But we should remember that the excesses and disparities of the 1920s precipitated the greatest economic catastrophe in modern history, a disaster alleviated only by the massive stimulus of WWII. Let this latest incarnation of Gatsby be a wake-up call to the economic reality of 2013. We, as a country, must decide whether we will build an economy where growth is shared by all, or let policies of austerity, tax cuts for the wealthy, and inadequate regulation of Wall Street continue to feed growing inequality. We know too well how that story ends.

(Animation taken from The Great Gatsby trailer)

References:

Bivens, Josh. 2011. Failure by Design: The Story behind America’s Broken Economy. An Economic Policy Institute book. Ithaca, N.Y.: Cornell, University Press.

Corak, Miles. 2012. “Inequality from generation to generation: the United States in Comparison”. University of Ottawa. http://milescorak.files.wordpress.com/2012/01/inequality-from-generation-to-generation-the-united-states-in-comparison-v3.pdf

Mishel, Lawrence, Josh Bivens, Elise Gould, and Heidi Shierholz. 2012. The State of Working America, 12th Edition. An Economic Policy Institute book. Ithaca, N.Y.: Cornell, University Press.

Happy Friday! Here are a few stories our experts read today:

• How the Case for Austerity Has Crumbled (New York Review of Books)
• My Two (Per)cents: How Are American Workers Dealing with the Payroll Tax Hike? (Liberty Street Economics)
• Poverty as a Childhood Disease (New York Times)

Though it didn’t get much attention, Democrats on the House Committee on Appropriations recently released a report on the effects of sequestration (pdf) and efforts to mitigate its impact. The report is a comprehensive look at sequestration cuts specific to the following areas: public safety, health, education and science, national security, judiciary and legal representation, commerce, housing, seniors, and foreign assistance. Some highlights in the report on the impacts of sequestration:

• NIH funding for research is cut by more than $1.5 billion, which the report estimates eliminates more than 20,000 jobs at universities, labs, and other research institutions.
• Funding for the Center for Disease Control and Prevention is cut by $285 million due to sequestration, inhibiting the CDC’s ability to—among other things—facilitate immunization, combat disease outbreaks, and manage and prevent both chronic and infectious diseases.
• The National Science Foundation loses $365 million due to sequestration, resulting in approximately 1,000 fewer research grants.
• National parks, forests, wildlife refuges, and public land units will be forced to reduce hours and cut services due to sequestration. The National Park Service alone will leave more than 900 permanent positions unfilled and hire 1,000 fewer seasonal workers this year.
• The Department of Housing and Urban Development will be unable to renew approximately 125,000 Section 8 vouchers this year due to sequestration cuts. Additionally, participants in this program will have longer waiting lists and increased rent payments, and landlords can expect to see lower rent payments and more vacant units.

The report also highlights some of the mitigation strategies used to minimize impacts; for example, congressional action on both FAA operations and meat and poultry inspectors. The report concludes that even though congressional action did diminish some of the immediate negative effects of sequestration, in the long-term these programs will still be impacted since sequestration cuts were merely replaced with other cuts. For example, cuts affecting air traffic controllers were replaced by funding coming from the Airport Improvement Program; in the future that program will have less funding to upgrade and improve airport infrastructure—key in longer-term efforts to ensure more efficient operations, ease congestion, and minimize delays. Furthermore, mitigation efforts such as this one are undesirable in that they not only allow for some interests to be boosted above others (not surprising that similar efforts were not made to spare Head Start or low-income housing), but they also sap the political will for the undoing of bad policy since privileged people now, for the most part, can escape the downsides.

Sequestration is terrible policy that is derailing our recovery—there is absolutely nothing redeeming about it. The $85 billion in spending cuts for FY2013 will impede growth, cost jobs, and as demonstrated above, harm programs and the people that depend on them. It should be reversed immediately and without political fanfare or quibbling on how to “pay for” cancellation. This is particularly true now that the Congressional Budget Office has updated their budgetary estimates in a report this week  (pdf) showing that the deficit estimate for FY2013 is about $200 billion less than they estimated it to be just two months ago, in February. Deficit estimates dropped, CBO states in the report, mostly due to higher than expected revenues and an increase in payments from Fannie Mae and Freddie Mac. (Revenue increased due to the expiration of the payroll tax holiday, higher tax rates on personal income above certain thresholds, personal income gains, as well as the realization of more income by high-income taxpayers late in 2012, in anticipation of changes to tax law).

Sequestration is harmful policy that was never a good idea. Its impacts on communities and the larger economy are beginning to sink in. It should be cancelled—and since Congress cannot/will not come to an agreement on how to replace the cuts, it should be cancelled without a pay-for. If anything, the new CBO report showing even smaller deficits in the years to come should accompany a renewed effort to reverse this terrible fiscal framework.

Happy Monday. Here’s what we’re reading today:

• Why Washington Saved the Economy, Then Permanently Destroyed the Labor Market (The Atlantic)
• Student Debt and the Crushing of the American Dream (New York Times)
  
• How Austerity Kills (New York Times)
• Who Can Take Republicans Seriously? (New York Times)
• Major Retailers Join Bangladesh Safety Plan (New York Times)

Various sources have reported on the intense lobbying efforts by industry representatives of the high-tech sector, who seek to influence the outcome of the Senate’s proposed comprehensive immigration reform legislation. The initial version of the Senate bill already grants the industry two of its key demands: an increased number of H-1B visas for university-educated temporary foreign workers (almost tripling the quota), most of whom work in the IT sector, as well as an unlimited amount of permanent resident visas (green cards) for recent foreign graduates of U.S. universities in STEM fields (and a fast track to receive them). So what is the industry hoping to achieve now? The industry is lobbying to remove the few improvements to the H-1B program that Senator Durbin (D-IL) managed to persuade the other seven members of the Gang of Eight to include in the bill. This week, a number of proposed amendments could make that happen.

Here are the simple, common sense rules and innovations included in the Senate bill that relate to the H-1B program:

1. A new H-1B job database.

Employers will now be required to advertise job openings on a national database maintained by the Department of Labor. This ensures that when jobs become available, U.S. workers will know about them and have a chance to apply. A common misconception about the H-1B program is that all firms are required to recruit local workers before applying for an H-1B worker—but that’s not the case. Only a subset of employers, those that are “H-1B dependent” (i.e., if more than 15 percent of their workforce holds an H-1B) are required to first engage in “good faith” recruiting. (That’s already the law, and the Senate bill doesn’t change it.) The database will be a simple and easy way to infuse the H-1B program with a much-needed dose of transparency and to allow American workers the opportunity to apply to these openings.

2. Employers will have to offer jobs to any U.S. worker who applies and is equally or better qualified than the H-1B worker they seek to hire.

This provision in the law has the potential to be an important step forward in terms of protecting the interests of U.S. workers in high-tech fields. However, it is still unclear how this will work in practice. For example, will there be an administrative remedy through DOL? Will U.S. workers be able to file individual or class action lawsuits? Whatever the result, this provision should be enforced in a way that doesn’t dictate who an employer should hire, but that protects U.S. workers from obvious discrimination if an employer chooses to prefer an H-1B worker over a qualified American. The threat of a lawsuit from a U.S. worker claiming to suffer discrimination could act as a strong deterrent to employers that might consider acting illegally.

3. The “50/50” rule.

Some of the biggest beneficiaries of the H-1B visa are companies with an offshore outsourcing business model that transfer high-tech jobs overseas. A number of those companies have a workforce made up primarily of temporary foreign workers holding H-1B and L-1 visas (the L-1 visa (pdf) is another temporary visa mainly used for computer and IT occupations). Past bipartisan legislative proposals have attempted to curb offshore outsourcing by prohibiting firms from receiving additional work visas if more than 50 percent of their workforce is comprised of guestworkers with H-1B and/or L-1 visas—this is known as the 50/50 rule. The Senate immigration bill would phase in the 50/50 rule over three years, and has the potential to curb H-1B visa abuse amongst certain firms.

Any reasonable person has to concede that globalization and offshoring are irreversible trends, but U.S. government policy should not facilitate and expedite the overseas transfer of decent paying high-tech jobs. In a surprising turn, even the CEO of the largest tech company in the world, Microsoft’s Brad Smith, seemed to admit this when he endorsed the 50/50 rule—explicitly stating “I do support that”—in response to a question from Senator Durbin in a recent Senate hearing. Smith further acknowledged “there’s no large country in the world that allows people to employ over half of their people from outside the local population.”

Are these requirements onerous?

Not if the industry is already doing everything it can to recruit and hire U.S. workers before using the H-1B program. So why do some of its representatives oppose posting jobs online and offering jobs to qualified U.S. workers first? Or go so far as to call these provisions a “poison pill?” If H-1B employers already recruit U.S. workers—and if U.S. workers are as scarce as the industry claims—then what’s so difficult about being prepared to prove it?

Many U.S. workers claim they have been shut out of jobs reserved for H-1Bs, and the media has reported on examples of U.S. workers being replaced by H-1B workers. As a result—and since H-1B employers are asking the government for a special and significant privilege, i.e., an intervention into the American labor market (what Milton Friedman called a “government subsidy”)—it’s reasonable to require some basic assurances that the program isn’t being used to bypass or replace U.S. workers.

Furthermore, only the small number of H-1B dependent firms must comply with any meaningful obligations in the program. Under current law they must recruit U.S. workers in good faith, and under the Senate bill, not underpay H-1B workers compared to U.S. workers in the same occupation and locality, and not rely on temporary foreign workers for more than 50 percent of their workforce. However, thanks to a successful lobbying effort by Facebook, a massive loophole was included in the Senate bill that allows dependent firms and those above the 50-50 threshold to be exempted from all of these rules if they apply for labor certifications and green cards for 90 percent of their H-1B and L-1 visa holders.

On balance, the Senate immigration bill represents a major victory for the high-tech industry. Thus, Senators in the Judiciary Committee are under no obligation to deregulate the H-1B program even further, as some on the committee are proposing. High-tech firms will now benefit from a drastically increased number of temporary and permanent visas and prevailing wage rules that still allow most H-1B employers to continue paying foreign workers wages that are far below market rates, and they won’t face any new significant burdens in terms of having to recruit U.S. workers before they’ll be granted an H-1B visa.

The Brookings Institution issued a new report on Friday about the H-1B program—a temporary foreign worker program for “skilled” occupations, meaning those that require a college degree—and then issued corrections to it almost immediately afterwards.

The report claims to include a wage analysis on “new data” that, “suggests that the H-1B program helps to fill a shortage of workers in STEM [science, technology, engineering and math] occupations.”  

There are two critical problems with the report’s analysis of these data:

First, the data are proprietary, meaning the data are exclusively held by the authors, thus no one can critique or review the study’s presentation of the data or its findings. (The authors obtained the data from two other researchers, who first obtained it through a Freedom of Information Act request.) This kind of approach, where researchers use data that are not available publicly, means that the data and subsequent analysis can never be checked, leaving out a critical step in the scientific process.

This step is critical because mistakes happen. In fact, just hours before it was to be released the authors shared the study with me. They did not ask for a critical review, and it would have been impossible for me to conduct one given the short time frame (typically a reviewer is given two weeks to provide input), and more importantly, I did not (and still do not) have access to the proprietary data.

As I skimmed the report I found a few peculiar items in the study. Since I have spent more than a decade working on the H-1B program, and these data are presented at an aggregate level by U.S. Citizenship and Immigration Services (USCIS) on an annual basis, I’m quite familiar with them.

The Brookings researchers had only 105,000 H-1B workers in their data but USCIS reported (in its 2010 Characteristics of Specialty Occupations report) that almost 193,000 H-1B workers were approved that year. It turns out that the Brookings study was missing nearly 88,000 workers, or approximately 45% of the data, in their analysis. This is the exact same data, so there is no logical reason for the discrepancy.

I pointed out this serious discrepancy to the authors, and they dismissed my concerns. After I repeatedly pointed out why their data didn’t make any sense—after all, USCIS was reporting the same data with many more workers—the Brookings authors realized I was correct.

They had erroneously thrown out 45% of good data before even beginning their analysis. Subsequently, their study was changed on the fly to include the data. This was an honest albeit elementary mistake, since anyone who works on the H-1B program is familiar with the size of the program.

Mistakes get made in the course of research, which is why it is critical to have multiple pairs of eyes scrutinizing the data and the analysis. But when researchers use proprietary data, as the Brookings report does, it precludes these critical steps in the scientific process.

Without public access to the data there is no way for the Brookings report to be properly reviewed.

Second, notwithstanding the major data problems in the report, the study makes many questionable analytic choices. I will only point to one of them here.

The report attempts to evaluate whether H-1B workers are underpaid. The key issue is to design your analysis so that you are comparing apples to apples. But the Brookings study fails this basic standard in a number of ways.

Its key table on wage analysis (Table 1) tries to make a comparison of H-1B wage levels against comparable American workers.

However, it does so by using a very expansive definition of comparable American workers. In calculating “American Wages” it includes all computer occupations, including technician level workers like Computer Support Specialists. This category is a significant share of all computer occupations and has relatively very low wages. By including the low wage categories in its analysis, Brookings is systematically lowering the reported American wages, thereby making H-1B wages appear higher than they are.

The upshot is that the authors are making an apples to oranges comparison.

The Brookings report adds no value to the question of H-1B wages. USCIS actually provides more detailed and more useful tables of the same data in its annual report (for example, see Tables 10, 11, and 12 here).

The U.S. Government Accountability Office attempted a similar exercise with the same data set that Brookings is using (but from an earlier year, 2008). After describing the various weaknesses in the data (see pages 82-83) the report concluded: “In light of these limitations, caution should be used in interpreting differences found in comparing estimated 2008 median U.S. citizen worker salaries and the median salaries for H-1B worker petitions submitted in 2008.” Brookings does nothing to allay or account for, or even acknowledge these limitations.

And it is well known that the H-1B program is used for cheaper labor.

Industry veteran Neeraj Gupta testified before the Senate Judiciary Committee on April 22 that most H-1Bs are being used for cheaper labor. Just a few weeks ago, a Wall Street Journal article about proposed changes to the H-1B program reported that “Indian IT professionals working in the U.S. are typically paid about 25% less than their American counterparts.” And some H-1B employers themselves have told government auditors that they hire H-1Bs because they can be paid less (for example, see page 4 of this report).

I will post a more detailed critique of the Brookings data and report later this week. For another take on the weaknesses in the report’s methodology, see U.C. Davis Professor Norm Matloff’s analysis from his email newsletter.